Report: Chinese Steel Overcapacity an Ongoing Problem Leading Up to G20 Summit

Report: Chinese Steel Overcapacity an Ongoing Problem Leading Up to G20 Summit

Our colleagues at the Alliance for American Manufacturing today released a new report entitled “Overcapacity in Steel: China’s Role in a Global Problem” – authored by Duke University’s Center on Globalization, Governance & Competitiveness. The report analyzes the causes, effects, and public policy solutions to address the steel overcapacity problem. It zeroes in on China’s overinvestment in steelmaking, and how China has been unable, or unwilling, to address the problem with effective solutions.

China’s massive steel overcapacity is driving a global problem that will require significant action to resolve, according to a new report released ahead of the G20 economic summit. President Obama plans to discuss excessive capacity at the meeting, which will be held in eastern China.

“China’s industrial overcapacity in the steel sector may be the most daunting challenge facing manufacturing in the rest of the industrialized world today,” said Scott Paul, president of the Alliance for American Manufacturing (AAM). “So it is no surprise that President Obama wants to raise China’s excess at the summit. Beijing has promised to cut capacity for years, but China just hasn’t stopped.”

The new Duke University Center on Globalization, Governance & Competitiveness (Duke CGGC) report, “Overcapacity in Steel: China’s Role in a Global Problem,” comes amid dozens of American steel plant closures. The report found that since 2000, Chinese steel capacity has ballooned due to state subsidies and strong government incentives. Overcapacity continues today, with China accounting for nearly half of the world’s steel overcapacity in 2015 alone.

“At the root of the overcapacity problem is a supply and demand imbalance caused by the buildup of production capacity,” said Lukas Brun, the report’s author. “Furthermore, because of the political-economic system in China, it hasn’t had success in reducing capacity in its state-owned enterprises because it’s worried about unemployment and social stability.”

China has acknowledged its steel overcapacity problem and has made repeated commitments to reduce capacity, yet either due to unwillingness or inability, the government hasn’t honored its commitments.

Other countries, including India, are planning further investments that will compound the problem. More than 100 million metric tons (MT) of new capacity additions are underway, and 352 MT of new capacity are planned to be completed by 2017.

Trade enforcement is an important step, but actions are reactive and expensive, costing between $1.5 – 2 million each. As a result, more tools are needed to combat this staggering overcapacity.

“This report reveals how the glut of Chinese steel being illegally dumped into the global marketplace has been going on for years,” said Rep. Tim Murphy (R-Pa.), who signed a letter asking President Obama to raise China’s illegal trade practices during the G20 summit and upcoming Organisation for Economic Co-operation and Development forum. “It’s high time we take aggressive and immediate steps to shut down the trade cheats and put our efforts towards building a strong American manufacturing presence across the globe.”

The letter, being sent by the Congressional Steel Caucus prior to the G20 summit, asks the president to continue building international support for the development of clear consequences for China’s role in the steel overcapacity crisis.

“American steelworkers and steel companies make the best steel in the world and they deserve to be able to compete on a level playing field,” said Rep. Peter Visclosky (D-Ind.), a lead signatory.

The lawmakers’ letter also points out the need for China remain a “non-market” economy (NME), a designation that allows the United States to better respond to unfair trade practices from the state-run economy. China was labeled an NME as part of entry negotiations into the World Trade Organization (WTO) 15 years ago and is aggressively lobbying both the United States and the European Union to grant a status change by the end of 2016, despite failing to meet qualifiers outlined during its WTO entrance. The Commerce Department is responsible for determining the designation, but some Members of Congress are urging the administration via a forthcoming resolution to follow the law when making the decision at the end of this year.

The Duke CGGC report also maintains that China is a NME and outlines overcapacity solutions including having steelmakers adjust capacity based on market signals, rather than depending on state subsidies, and having governments reduce incentives for growing steel stock.

“Trade enforcement has been key for the current presidency, but the next administration needs an expanded approach that upholds U.S. laws, invests in infrastructure and provides proactive tools to combat illegal trade practices,” Paul said. “Without such an approach, you can expect more job losses and more plant closures.”

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